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Topic 11: Performance Measurement, Incentives, and Compensation (Ch.23) Scope: A. General issues B. Performance measurement for profit centers - Segment reporting C. C Performance measurement for investment centers - ROI - Residual income; EVA

ACCT3210 – Spring 2013 (G Zhang)


A. General Issues
Purposes of performance measurement
 

Employee motivation (requiring a reward system) Resource allocation

Examples of performance measures
Financial Fi i l Internal External ROI, Income Stock price Non-Financial N Fi i l Manuf. lead time Customer satisfaction

Balanced scorecard
ACCT3210 – Spring 2013 (G Zhang) 2

Accounting Based Evaluation Techniques for Different Responsibility Centers Diff R ibili C Cost center: Flexible budgets g Variance analysis for input costs Productivity analysis Flexible budgets Sales variance analysis Customer profitability analysis Segment reporting g p g

Revenue center:

Profit center:

Investment center: ROI; Residual income; EVA

ACCT3210 – Spring 2013 (G Zhang)


B. Performance Measurement for Profit Centers
Two issues:  How to measure the “profit” of a division  How to set the prices of transferred goods/services f f / (transfer pricing) Segment reporting: Use segmented income statements in contribution format. It shows, for each segment, sales, contribution margin and segment margin margin, margin. Guidelines to assign costs to segments:  assign costs according to cost behavior  assign costs according to whether the costs are directly traceable to segments ACCT3210 – Spring 2013 (G Zhang) 4

Performance Measurement for Profit Centers
Variable costs are first traced to segments: Sales – Variable costs = Contribution margin Fixed costs are classified as traceable (direct) and common (indirect) costs Traceable fixed costs arise because of the existence of the particular segment; these costs would disappear over time if the segment itself disappears. t it lf di Common fixed costs support more than one business segment but are not traceable to any one of those segments.

Contribution margin – Traceable fixed expenses = Segment margin ACCT3210 – Spring 2013 (G Zhang) 5

Mary Fischer, the owner of Mary’s Market, would like information concerning the performance of the Market’s two main segments: p p meat and produce departments. The following partial list of costs was provided to help identify fixed and variable and traceable and common costs: Meat Department Variable costs • Wholesale cost of meats • Packaging materials • Wholesale cost of produce • Plastic bags and ties Produce Department

ACCT3210 – Spring 2013 (G Zhang)


Example (continued)
Meat Department Traceable fixed costs: Produce Department • Meat department p • Produce department p manager’s salary manager’s salary • Butchers’ wages * • Workers’ wages * • Meat department depn* • Produce dept. equip.* • Rent on space occupied • Rent on space occupied by meat department ** by produce department ** Common fixed costs: • Rent for general offices, checkout counters etc offices counters, etc. • General manager’s salary • Accountant’s salary • Checkout clerks wages clerks’ • Liability insurance premiums

* Depending upon circumstances, all or part of the indicated costs could change. ** This assumes that the rent costs would be avoided if the department were eliminated. ACCT3210 – Spring 2013 (G Zhang) 7

Sales Less variable expenses Contribution margin Less traceable fixed expenses Segment margin Less common fixed expenses not traceable to departments Net income

Total Company $1,500,000 , , 810,000 690,000 400,000 290,000 290 000 240,000 $ 50,000

Departments Meat Produce $900,000 , $600,000 , 460,000 350,000 440,000 250,000 230,000 170,000* $210,000 $210 000 $ 80 000 80,000

Sales Less variable expenses L i bl Contribution margin Less traceable fixed expenses Product line segment margin Less common fixed expenses not traceable to product lines Departmental...
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